Weather derivatives provide better risk management alternatives for industries, which are exposed to weather-based risks. Dynamic pricing of weather derivatives requires a suitable underlying temperature model. This paper is the first to model the average daily temperatures and prices of...

Daily average temperature variations are modelled with a mean-reverting Ornstein-Uhlenbeck process driven by a generalized hyperbolic Levy process and having seasonal mean and volatility. It is empirically demonstrated that the proposed dynamics fits Norwegian temperature data quite...